UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the Fiscal Year Ended June 30, 2004

OR

For the transition period from ____________ to ________ .

Commission File Number 000-26934

Hyperion Solutions Corporation

1344 Crossman Avenue, Sunnyvale, California 94089
(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (408) 744-9500

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.001

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]   No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X]   No [  ]

The aggregate market value of the registrant’s common stock held by non-affiliates on December 31, 2003, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $944 million (based on the closing sales price of the registrant’s common stock as reported on the Nasdaq National Market on that date). Shares of the registrant’s common stock held by each officer and director and each person who owns 5% or more of the outstanding common stock of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of July 31, 2004, there were 39,494,204 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for its 2004 Annual Meeting of Stockholders, scheduled to be held on November 10, 2004, are incorporated by reference in Part III of this Form 10-K.

HYPERION SOLUTIONS CORPORATION

FORM 10-K

“Hyperion,” the Hyperion “H” logo and Hyperion’s product names are trademarks of Hyperion Solutions Corporation. References to other companies and their products use trademarks owned by the respective companies and are for reference purposes only.

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FORWARD-LOOKING STATEMENTS

Certain information contained in this report on Form 10-K is forward-looking in nature. All statements included in this report on Form 10-K or made by management of Hyperion Solutions Corporation and its subsidiaries, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding Hyperion’s future financial results, operating results, business strategies, projected costs, products, competitive positions and plans and objectives of management for future operations. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “would,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the section entitled “Factors That May Affect Future Results.” These and many other factors could affect Hyperion’s future financial and operating results, and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by Hyperion or on its behalf. Hyperion does not undertake an obligation to update its forward-looking statements to reflect future events or circumstances.

PART I

ITEM 1. BUSINESS

OVERVIEW

Hyperion Solutions Corporation is a leading provider of Business Performance Management (“BPM”) software, which enables companies to translate strategies into plans, monitor execution, and provide insight to manage and improve financial and operational performance. Hyperion provides customers with solutions that include analysis and reporting tools, a business intelligence (“BI”) platform, packaged and tailored applications, and related services. Our solutions support the enterprise-wide processes for proactively managing any business toward optimal performance against goals and for anticipating and forecasting results.

Business Performance Management builds on business intelligence (commonly referred to as query, reporting and analysis), which provides information (including historic analysis, statistical predictions, and forecasts) that helps managers understand how their business is performing at any moment in time. Using data from transactional systems such as accounting, billings, bookings, supply chain, sales force automation, and call centers, our Business Performance Management solutions are used by employees at all levels across organizations – in the finance department and beyond – to provide a single version of the truth about an organization’s performance. Organizations can then leverage this information, which is presented in intuitive, easy-to-understand graphical views, to support continuous performance improvement and accountability.

We use our online analytical processing (“OLAP”) technology, Hyperion Essbase, as the analytic foundation for the Hyperion BI Platform. Components within Hyperion Essbase can be used individually to create tailored applications, or in conjunction with our packaged applications to support the entire Business Performance Management process.

On October 16, 2003, Hyperion completed the acquisition of Brio Software, Inc., a business intelligence software provider based in Santa Clara, California. The integration of Brio’s business intelligence software into our product portfolio has further enriched our platform’s query and reporting ability to access relational databases easily and quickly, and to support thousands of users. The Brio tools complement our Business Performance Management offerings and extend the use of business intelligence in the Business Performance Management processes of our customers.

Hyperion offers support and services from offices in 20 countries and works with more than 600 partners to provide solutions to more than 9,000 customer organizations worldwide.

INDUSTRY BACKGROUND

In response to today’s renewed focus on corporate profitability, many businesses are seeking systems that can support the full business cycle — from strategy formulation, to the creation and adaptation of plans and operational execution, as well as the monitoring and reporting of results. It is common for organizations to have multiple general ledger, order entry, and partner and customer interaction systems worldwide. Companies need to unlock the volumes of transactional and operational information captured in these different information systems and in different formats. With Business Performance Management, organizations can consolidate their financial and operational systems’ information, turn the raw data from these systems into meaningful business information, and use this information to optimize performance across the entire enterprise.

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We see five business imperatives driving increased demand for Business Performance Management solutions. These are the need to 1) increase visibility, agility and measurable accountability across the enterprise; 2) achieve necessary alignment among business and functional units for tight strategy execution; 3) increase the quality of management reports and have every manager work from the same set of facts; 4) prepare to comply with new and more stringent regulations on a global scope; and 5) extend existing information technology investments to make information accessible and actionable throughout the organization with the aim of increasing the speed, quality and accuracy of decision making.

These imperatives are in contrast to the tactical manner in which some organizations address analysis requirements today. Using siloed applications, disconnected query and reporting tools and spreadsheets, for example, employees in different functional areas conduct analyses that are potentially incomplete or inaccurate. When organizations deploy pervasive Business Performance Management applications, however, they obtain consistent information to create and execute strategic, financial and operational plans that are accurate and aligned.

To be useful, all of the data must be accessed, cleansed, transformed, extracted and then analyzed using an assortment of sophisticated quantitative methods. This data must be summarized, visualized and presented in a variety of formats — from spreadsheets and specialized financial report formats, to multidimensional views and graphical Web-based presentations — that are meaningful and intuitive to users throughout the organization. Since most global organizations use multiple operational systems that capture data in different formats, integrating and interpreting this enterprise data is an increasingly critical requirement. In order to take full advantage of the value of the data stored in existing systems and accelerate decision-making, organizations require specific Business Performance Management applications that provide data quality and integrity, scalability and ease-of-use across the organization.

STRATEGY

Our objective is to profitably gain market share as the leading global provider of Business Performance Management solutions. We will accomplish this by continuing to address our customers’ pain points with our packaged applications, tailored solutions, and query and reporting products. While some customers buy our entire product suite, others adopt our “Start Anywhere” approach, which enables them to implement Business Performance Management in a step-by-step fashion. They begin by addressing one or two specific business problems and add additional Hyperion solutions over time. This approach shortens the time it takes for customers to recognize the value of our solutions and allows them to absorb change gradually.

Our leading market share in packaged applications for planning and for financial consolidation and reporting has given us a strong presence in the finance departments of our customer organizations. Our BI platform, greatly strengthened with the additions of our query and reporting products (Hyperion Performance Suite) and the June 2004 release of Hyperion Essbase 7.1, gives us the flexibility to address business solutions beyond finance. Hyperion Performance Suite enables new opportunities such as dashboarding (the face of Business Performance Management), profitability management, risk management, sales analysis, and workforce management. Performance Suite has brought us into many new customer transactions during the past fiscal year, as query and reporting can be the first steps companies take toward implementing broader Business Performance Management initiatives.

Hyperion will continue to focus on providing an interoperable suite of products – products that are designed to exchange information and use the information they exchange – as well as an enterprise-class solutions approach to Business Performance Management. Interoperability enables customers to add applications over time with confidence that the new applications will work well with existing ones. It also ensures that our customers can work collaboratively within a single environment, rather than having to move from one disconnected application to another. Some features necessary for interoperability have the added benefit of making our applications easier to install and use. This means people with less technical knowledge can use our BPM applications, which will help us expand to new users within customer organizations.

In addition, we believe that high levels of customer service and satisfaction are critical to the successful marketing and sale of our new and existing products. We provide a broad range of worldwide consulting, training and support services that help customers and partners implement, customize, enhance, support, and extend their Business Performance Management solutions. We are committed to maintaining a world-class workforce to deliver these offerings.

Hyperion will also continue to expand its network of partners who deliver complementary products and services and meet a wide variety of customer requirements. Partners’ offerings include packaged Business Performance Management applications, unique data and application integration technologies, tools, and training services. They leverage the Hyperion BI Platform as the enterprise analytics infrastructure to deliver breakthrough performance and advanced analytics. Our partner relationships increase the network effects of our platform, enhance our market reach, and provide our customers with greater flexibility and choice for their Business Performance Management solutions.

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Key elements of our strategy include:

Leverage Existing Market Position. We believe our key strengths include our established distribution channels and comprehensive strategic technology. We also believe that our proven domain expertise and credibility gained in the financial area can be leveraged to capitalize upon the substantial market opportunity in the adjacent operational analytics space. We have enhanced the core component of our Hyperion BI Platform, Hyperion Essbase, to significantly improve its ability to handle non-financial or sparse data. We intend to continue to seek the co-development of vertical and horizontal applications with outside organizations. We also intend to enable all of our packaged applications to further exploit the Hyperion BI Platform, creating a key differentiation from competing products.

Deliver Enterprise-Class Solutions. Hyperion’s enterprise-class solutions approach to Business Performance Management further accelerates the time-to-benefit for our customers by addressing specific business challenges on an enterprise-wide basis. Examples include profitability management; dashboards for monitoring and enterprise-wide control, financial consolidation, reporting and compliance; enterprise planning; and an enterprise-wide analytics and business intelligence infrastructure.

Increase Focus and Penetration of Key Markets. We plan to focus our intellectual capital and leverage our partners to provide best-of-breed Business Performance Management solutions in key markets. These solutions include financial management, profitability management, risk management, customer relationship management analysis, industry-specific solutions, general OLAP-based solutions and data warehousing.

Foster Strategic Partner Relationships. To accelerate the adoption of Business Performance Management solutions, we have established relationships with more than 600 partners, including the following:

-		Consulting Partners include large systems integrators, regional consulting firms, professional services organizations and value added resellers (“VARs”). These partners deliver custom application consulting and related implementation, integration and/or training services.
-		Independent Software Vendor Partners integrate their products with our core technology to develop business intelligence enhancements and deliver added value with their solutions.
-		Original Equipment Manufacturer (“OEM”) Partners embed our products in their own applications to form specialized analytical solutions for vertical markets or functional applications.
-		Distribution Partners market, distribute and support our software solutions in remote markets where we do not have a wholly owned corporate presence.
-		Technology Partners offer tools and technologies that integrate with our business intelligence platform and help customers build, use, and manage our analytical and Business Performance Management solutions.
-		Alliance Partners cooperatively position and market the benefits of a comprehensive, integrated, multi-vendor solution to the marketplace based upon our Business Performance Management products.

Our partner network enhances and expands our distribution channels and extends our Business Performance Management solutions by providing a wider range of choices for our customers.

Leverage the Web for Ease-of-Implementation and Ease-of-Use. Our newer packaged application products are designed to leverage Web-based technologies and facilitate collaboration throughout the organization. By building scalable, high performance applications that can be accessed via an intranet or the Internet, corporations can improve their business processes, gain efficiencies, improve agility to respond to changing market conditions, and improve bottom line performance. By leveraging the Web browser as a user interface, a corporation’s information technology department can deploy and maintain applications more quickly and easily with reduced costs compared to client-server and desktop implementations.

Maintain Sales and Support Relationships. We license our products to customers throughout the world through a direct sales force as well as through OEMs, VARs and independent distributors. Together with our partners, we often provide installation and post-sale consulting support to build long-term customer relationships.

Generate Follow-on Revenues. We generate revenues from existing customers through licensing of additional users, the cross selling of licenses of new products, annual maintenance fees, and sales of training and consulting services. Follow-on revenues leverage sales and marketing resources and strengthen relationships with our customers.

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PRODUCTS

Hyperion’s Business Performance Management Applications

Hyperion’s Business Performance Management suite is an interoperable group of applications that delivers budgeting, planning and forecasting, consolidation and reporting, dashboarding, performance scorecarding, modeling, and optimization — on an open, scalable, secure and Web-based business intelligence platform.

Hyperion Planning is a Web-architected application that helps coordinate and manage all the elements of the planning, forecasting and budgeting cycle. It drives collaborative, integrated, event-based planning, forecasting, and budgeting processes throughout the organization for a wide range of financial and operational needs. Hyperion Planning provides a comprehensive approach that can drive continuous profit improvement. Decision makers and front-line managers communicate which course of action to take and get budget holders to collaborate, so that all profitability improvements can be identified and acted upon.

Hyperion Financial Management is a Web-based application that delivers financial consolidation, reporting and analysis in a single, highly scalable solution. Employees, subsidiaries, branch offices and partners operate from the same page and with a single unified view of key financial data at any moment in time. Hyperion Financial Management generates consolidated results for both internal management and regulatory bodies and is used to facilitate compliance with the Sarbanes-Oxley Act of 2002.

Hyperion Business Modeling provides advanced profitability analysis by combining operational factors with supporting financial data to provide true costs and profitability. It is a sophisticated enterprise-class modeling solution that enables companies to test operational and financial planning assumptions, optimize resources, and measure profitability. With Hyperion Business Modeling’s powerful simulation environment, managers dynamically test and compare alternate business scenarios and identify the optimal solution to maximize business performance.

Hyperion Strategic Finance is a strategic financial modeling application that gives corporate development, finance and treasury executives real-time analysis of alternative strategies. It enables them to analyze the financial impact of critical business decisions and to choose the strategic path of greatest value to deliver continuous performance improvement. Financial executives create customized dashboards and report quickly and accurately to assess earnings and demonstrate the quality of earnings in relation to cash flow.

Hyperion Performance Scorecard is a Web-based Balanced Scorecard Collaborative application that provides a strategic management infrastructure for measuring and monitoring business performance. Hyperion Performance Scorecard can give companies a clear understanding of corporate strategy, objectives and accountability, including method and non-method based scorecards, while proactively monitoring their actions and performance against targets and industry benchmarks.

Hyperion Enterprise is a packaged application that can improve departmental financial consolidation and reporting efficiency by streamlining the collection, consolidation and reporting of financial results in a global environment. It frees financial managers from spreadsheets and general ledgers, enabling them to reduce the financial close cycle and improve the quality of financial information. Hyperion Enterprise can be distributed and installed at remote offices quickly and easily. It can be fully deployed by the finance organization with limited IT support – even on a stand-alone PC.

Hyperion Pillar can improve departmental budgeting efficiency by streamlining the distributed, financial budgeting process and increasing accountability. It frees managers from budget mechanics, enabling them to focus on value-added reporting and analysis.

Hyperion’s Business Intelligence Platform

Hyperion offers a foundation of enabling tools and technologies for the deployment of business intelligence and development of Business Performance Management applications. The Hyperion Business Intelligence Platform is a combination of the Hyperion Essbase and Hyperion Performance Suite product families. The combined capabilities make it the only enterprise scalable, high-performance platform that is easy to deploy and to use, and that meets the full range of enterprise business intelligence needs with advanced analytics functionality, enterprise reporting tools, and personalized interactive dashboards.

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Hyperion Essbase is the single enterprise analytics infrastructure for all analytics needs across the enterprise. Unlike other relational and OLAP database products, Hyperion Essbase now provides the industry’s first real-time business intelligence platform. It meets the most demanding data scalability requirements of sales, marketing, and supply chain users as well as the most complex analytic requirements of finance managers—all with a single architecture. Hyperion Essbase 7.1 is the most scalable analytic solution available today and the only analytic solution that can scale to terabytes of sparse data, while providing sub-second response time to thousands of concurrent users. It also delivers the first visual spreadsheet for querying and navigating multidimensional data, enabling end users to have an intuitive method for visualizing large data volumes across dozens of key business dimensions. Hyperion Essbase reduces the total cost of ownership and increases the return on investment compared to multiple solutions from several vendors, by combining data integration, metadata management, online analytical processing, query and reporting, ad hoc analysis and application development tools into a comprehensive Business Performance Management solution.

The Hyperion Essbase product family delivers services to (1) access and integrate data and metadata from a wide range of sources, (2) perform advanced analytical processing and (3) deploy business performance applications across the enterprise. Comprehensive platform services run on multiple operating systems, leverage multiple relational databases, access data from diverse transactional business systems and deliver high-performance financial and operational reporting. With the Hyperion Essbase product family, businesses leverage existing investments in technology and extend their analytical capabilities across the enterprise.

•		Essbase Administration Services centralize the management of business performance applications running on multiple servers and operating systems in geographically dispersed locations. They also reduce distribution and maintenance costs compared to decentralized administration and management.
•		Essbase Deployment Services extend the scalability and reliability of analytic applications, and support thousands of concurrent users in distributed environments with Web-based architectures. Connection pooling, database clustering, load balancing and failover help ensure applications are available 24X7.
•		Essbase Integration Services provide the tools and technologies to reduce the time and expense of integrating operational data with Hyperion Business Performance Management software. Specifically designed to work in a mixed-vendor environment, Integration Services provide a graphical environment to integrate data or metadata from transactional business applications, relational databases, data warehouses and legacy transactional systems as well as flat files, spreadsheets and XML documents.
•		Essbase Developer Tools, including Hyperion Objects and Hyperion Application Builder, provide a development environment for technical workers to create tailored applications that are customized to suit individual business needs. The Hyperion Developer Tools enable the rapid creation, management, and deployment of tailored analytic applications — with or without programming knowledge. A comprehensive set of value-added application programming interfaces (“APIs”), drag-and-drop components and services accelerate the deployment of tailored analysis applications that can grow and change with customer needs.
•		Essbase Analysis and Reporting Tools. Essbase also offers a broad range of user interfaces such as Essbase Spreadsheet Services for broad spreadsheet access across the extended enterprise, Hyperion Reports for book-quality financial reporting, Hyperion Analyzer for interactive analysis across the enterprise, and Hyperion Visual Explorer for visual navigation and analysis of massive multidimensional data sets.

Hyperion Hub is a centralized metadata manager for Hyperion’s applications and tools. It establishes links and manages data and metadata sharing across Hyperion Financial Management, Hyperion Planning, Hyperion Essbase, Hyperion Reports, and Hyperion Analyzer. A powerful interoperability tool, Hub gives users a common set of dimensions, hierarchies, measures, business rules, and reporting formats, regardless of the Business Performance Management process they are involved in. This increases the overall consistency in metrics and dramatically improves collaboration throughout the enterprise.

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Hyperion Performance Suite is an enterprise-class and Web-based query, analysis, and reporting software, based on a scalable foundation for information delivery. It allows users to access, analyze, and distribute information from disparate sources and to consolidate related information into personalized interactive dashboard applications. Hyperion Performance Suite offers a broad range of visualization options for report and dashboard designs – pixel perfect, charts, multidimensional pivot tables, key performance indicators (“KPIs”) and conditional formatting. Data exploratory capabilities, such as the interactive drill-anywhere feature, enable users to instantly expand their ad hoc analyses by adding items to their data set. Enterprise-level reporting capabilities deliver presentation-quality reports to end users, scheduled or on demand. The multiple output capability allows end users to select from a broad range of output types such as HTML, PDF, and Excel. The Web-based interface allows people to create, publish, and access self-service reports, analysis and dashboard applications in a distributed environment.

Dashboards created with Hyperion Performance Suite empower our customers—from the boardroom to line-of-business managers—to monitor performance and make smarter decisions by relying on measurable data and metrics via at-a-glance summaries of KPIs. People in departments everywhere in the enterprise use the dashboard interfaces via the client or the Web to quickly spot trends and anomalies, select different views of data, and drill to the next level of detail in order to gain valuable business insight and take the right action.

Hyperion Metrics Builder, also part of the Hyperion Business Intelligence Platform, delivers enterprise-wide metrics analysis and management capabilities to business users via a Web-based dashboard environment. With Hyperion Metrics Builder, our customers no longer have to wait for analysts to provide business-critical performance indicators. Instead, managers from the boardroom to any area of the business, can quickly and consistently identify, centralize, personalize and monitor all company KPIs in one place. Hyperion Metrics Builder enables customers to continuously monitor and analyze organizational performance against commonly agreed objectives. Combining data from existing information systems (such as ERP, SCM and CRM) with business decision processes, Hyperion Metrics Builder gives executives, line of business managers, and knowledge workers an interactive metrics analysis environment that makes performance information meaningful and easy to understand.

SALES AND MARKETING

We market and sell our products in North America and Latin America (the Americas), Europe, the Middle East and Africa (EMEA) and Asia Pacific (APAC) through our direct sales force and through OEMs, VARs and independent distributors. We support our sales force with lead generation and marketing programs, which include telemarketing, public relations, direct mail, advertising, seminars, trade shows, education, ongoing customer communication programs, third-party alliances and user group conferences. Worldwide and regional user conferences are held annually. Regional user meetings and product-specific focus groups are also scheduled periodically. Sales cycles generally last from three to nine months. We have dedicated sales, marketing and technical alliance resources designed to optimize our partner relationships. The direct sales force is compensated for direct sales as well as sales made through channel partners to ensure appropriate cooperation with our OEMs and VARs and independent distributors. We currently have more than 9,000 customers worldwide, many of which are multidivision and/or multilocation organizations with diverse information management requirements. In fiscal 2004, 2003 and 2002, approximately 41%, 39% and 35%, respectively, of our total revenues were derived from markets outside of North America. In the past three fiscal years, no single customer accounted for more than 10% of total revenues.

Our sales and marketing organization consisted of 851 employees as of July 31, 2004, of which approximately 290 employees were quota-carrying sales representatives. We have sales offices at our worldwide headquarters in Sunnyvale, California and in more than 40 other locations throughout the Americas, EMEA and APAC. Product support and training are also available in many of these locations.

We have been able to leverage sales and marketing through our partnering strategy with channel partners that distribute or resell our products in their respective markets. We have license and distribution agreements with independent distributors in many countries worldwide. The distributors generally maintain sales and services personnel dedicated to our products. The distribution agreements generally provide for the right to offer our products within a territory in return for royalties typically equal to 50% of license and maintenance fees.

License revenues derived from channel partners in fiscal 2004, 2003 and 2002 were 24%, 26% and 25% of total license revenues, respectively. Our channel partners include such firms as American Management Systems, BearingPoint, Deloitte & Touche LLP, Fujitsu Limited, Immix Inc., International Business Machines Corporation, Lawson Associates, Inc., SPSS Corporation, and Teradata.

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SERVICES AND SUPPORT

We believe that high levels of customer service and satisfaction are important to the successful marketing and sale of our products. We offer an extensive selection of worldwide training, consulting and technical support services to install, implement and support our products. Consulting and training services are not included in software license fees, but are generally provided on a time and materials basis. Our services and support organization consisted of 755 employees as of July 31, 2004. We have also established a global network of partners who deliver implementation and training services. Under the terms of our standard license agreement, customers may, at their option, pay a maintenance fee annually. This maintenance fee entitles customers to technical support, including telephone and Web-based support, and to any updates and enhancements provided for their software.

RESEARCH AND DEVELOPMENT

Our products have been developed by our internal staff, contract developers and through strategic acquisitions. Our development efforts are focused on new products, as well as on maintaining the competitiveness of our current product line. As of July 31, 2004, our product development was primarily performed by 493 employees located at our U.S. facilities in Sunnyvale, California; Stamford, Connecticut; Orlando, Florida; and Skokie, Illinois; and at our Canadian facility located in Toronto, Ontario.

In the fourth quarter of fiscal 2004, we signed an engineering consulting agreement with a consulting firm based in Bangalore, India in an effort to increase our multi-shore development capacity and capability. The expansion of our multi-shore initiative will be gradual over fiscal 2005 and will ultimately result in about 150 to 200 additional developers contributing to our development efforts in India. As of July 31, 2004, we have approximately 130 third-party contract developers contributing to our development efforts. These contract developers are primarily located in Minsk, Belarus and Bangalore, India.

COMPETITION

The markets in which we compete are intensely competitive, highly fragmented and characterized by rapidly changing technology and evolving standards. Current and potential competitors offer a variety of reporting, analysis, modeling and planning software solutions and generally fall within four categories: (1) vendors of packaged business analysis applications; (2) vendors of enterprise software applications that deliver transaction processes and front/back office automation; (3) vendors of OLAP server software that may also be marketed as part of a platform offering; and (4) vendors of front-end information access tools. As markets continue to develop for Business Performance Management products, additional competitors may enter or expand into those markets and competition may intensify.

Competitors, some of whom have significantly greater financial, technical, marketing and other resources than we do, may be better able to respond to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of their products than us. Also, certain current and potential competitors may have greater name recognition or more extensive customer bases that could be leveraged, thereby gaining market share to our detriment. We expect additional competition as other established and emerging companies enter into the enterprise software market and new products and technologies are introduced. In addition, as we develop and enhance our software and complementary products, the resulting new functionality may duplicate the functionality of, and thus compete with, other products offered by our channel partners. Increased competition could result in price reductions, fewer customer orders, reduced gross margins and loss of market share, any of which would materially adversely affect our business, operating results and financial condition.

Current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third-parties, thereby increasing their ability to address the needs of our existing and prospective customers. Further competitive pressures, such as those resulting from competitors’ discounting of their products, may require us to reduce the price of our software products, which would materially adversely affect our business, operating results and financial condition. There can be no assurance that we will be able to compete successfully against current and future competitors, and the failure to do so would have a material adverse effect on our business, operating results and financial condition. See the section entitled “Factors That May Affect Future Results” in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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PROPRIETARY RIGHTS AND LICENSES

We rely primarily on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. Despite our efforts, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult and, while we are unable to determine the extent to which piracy of our software products exists, software piracy is expected to be a persistent problem. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the United States. There can be no assurance that our means of protecting our proprietary rights in the United States or abroad will be adequate or that competitors will not independently develop similar technology. We have entered into source code escrow agreements with a number of our customers and channel partners requiring the release of our source code under certain conditions. Generally, such agreements provide that such parties will have a limited, nonexclusive right to use such code in the event that there is an undismissed bankruptcy proceeding by or against us, if we cease to do business or if we materially fail to meet our contractual obligations. The release of source code may increase the likelihood of misappropriation by third-parties.

We currently have a small number of patents relating to our products, including eight United States patents, three foreign patents and a number of patent applications pending in the United States and abroad. There can be no assurance that our patents will not be invalidated, circumvented or challenged, that the rights granted thereunder will provide competitive advantages to us or that any of our pending or future patent applications, whether or not being currently challenged by applicable governmental patent examiners, will be issued with the scope of the claims sought by us, if at all. Furthermore, there can be no assurance that other companies will not develop technologies that are similar or superior to our technology or design around the patents owned by us.

We expect that software product developers will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any such claim, with or without merit, could be time consuming to defend, result in costly litigation, divert management’s attention and resources, cause product shipment delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all. In the event of a successful claim of product infringement against us and our failure or inability to license the infringed or similar technology, our business, operating results and financial condition would be materially adversely affected.

We rely upon certain software that we license from third-parties, including software that is integrated with our internally developed software and used in our products to perform key functions. There can be no assurance that these third-party software licenses will continue to be available to us on commercially reasonable terms. The loss of, or inability to maintain, any such software licenses could result in shipment delays or reductions until equivalent software could be developed, identified, licensed and integrated, which would materially adversely affect our business, operating results and financial condition.

We distribute our products under software license agreements that grant customers a nonexclusive, nontransferable license to use our products and contain terms and conditions prohibiting the unauthorized reproduction or transfer of our products. Generally, we do not provide end users with the source code for our products except under the escrow arrangements described above.

EMPLOYEES

As of July 31, 2004 we employed a total of 2,473 employees. None of our U.S. employees is represented by a labor union. Certain foreign jurisdictions have workers counsels that typically represent workers on matters generally affecting terms of employment. We believe our relations with employees are good. Our executive officers as of July 31, 2004 are as follows:

Jeffrey R. Rodek has served as Executive Chairman of Hyperion’s Board of Directors since July 2004, after serving as Chairman and Chief Executive Officer since October 1999. He has been a member of Hyperion’s Board of Directors since January 1998. Prior to joining Hyperion, Mr. Rodek served as President and Worldwide Chief Operating Officer of Ingram Micro, a distributor of electronic products, from January 1995 to October 1999.

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Godfrey R. Sullivan has served as Hyperion’s President and Chief Executive Officer and as a member of the Board of Directors since July 2004. He joined Hyperion in October 2001 as President and Chief Operating Officer. From October 2000 to August 2001, Mr. Sullivan served as Chief Executive Officer of Promptu Corporation, an enterprise marketing automation software company. Previously, he spent eight years at AutoDesk, Inc., a design software and digital media company, in various senior management positions.

David W. Odell joined Hyperion as Chief Financial Officer and Corporate Vice President in August 2000. He joined Hyperion from KPMG LLP, a public accounting firm. He was with KPMG for over fifteen years, most recently as a partner in the firm’s Sydney, Australia office.

W. Russell Wayman joined Hyperion as Corporate Vice President, General Counsel and Secretary in January 2001. Prior to that he was Vice President and General Counsel of Etec Systems, Inc, a semiconductor manufacturing equipment company, from 1998 to 2000.

Burton Goldfield joined Hyperion as Senior Vice President of Worldwide Field Operations in January 2004. Prior to joining Hyperion, Mr. Goldfield was employed by IBM Corporation where he served as Vice President of Worldwide Sales for the Rational software brand from February 2003 to December 2003. From April 2001 to February 2003, he served in various senior management positions at Rational Software Corporation, most recently as Senior Vice President. From February 2000 to April 2001, he served as Vice President of Worldwide Sales at Catapulse after its spin-off from Rational. Prior to that, he served in various senior management positions at Rational Software Corporation from August 1989 to February 2000.

Nazhin Zarghamee joined Hyperion as Chief Marketing Officer in February 2002. Before joining Hyperion, Ms. Zarghamee served as Vice President of Worldwide Marketing at Documentum, an enterprise content management company, from October 1999 to October 2001. From April 1999 to October 1999, Ms. Zarghamee served as Vice President of Marketing for The Business Network. From August 1994 to April 1999, Ms. Zarghamee was employed by Oracle Corporation, most recently as Senior Director of Worldwide Marketing.

AVAILABLE INFORMATION

We make available free of charge in the Investor Relations section of our Internet website (www.hyperion.com) our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission. These filings are also available on the Securities and Exchange Commission’s website at www.sec.gov. Information contained on our website is not part of this report.

ITEM 2. PROPERTIES

Our current corporate headquarters consist of leased facilities totaling approximately 100,000 square feet in Sunnyvale, California and approximately 140,000 square feet in Santa Clara, California. The Sunnyvale facility lease expires in December 2006 and the Santa Clara facility lease expires in June 2010. We also own and occupy approximately 230,000 square feet in Stamford, Connecticut. These facilities are used by our administrative, sales, marketing, product development, customer support, and services groups.

In connection with our acquisition of Brio Software, Inc. in October 2003, we announced a plan to consolidate our two corporate headquarters buildings into a single facility. As such, in June 2004 we entered into a lease agreement for a new corporate headquarters facility located in Santa Clara, California. This new headquarters facility totals approximately 220,000 square feet, and the lease expires in December 2014. We expect to vacate our existing Sunnyvale and Santa Clara buildings and move into this new corporate headquarters facility during the second quarter of fiscal 2005. We are currently attempting to secure subtenants for the facilities that will be vacated.

Additional leased facilities in the United States include offices located in Irvine, California; Orlando, Florida; Kennesaw, Georgia; Lisle and Skokie, Illinois; Waltham, Massachusetts; Parsippany, New Jersey; Fairborn, Ohio; and Dallas, Texas, which are primarily used for sales, marketing, and services. Leased facilities located outside of the United States and used primarily for sales, marketing, customer support and services include facilities located in Toronto, Canada; Sao Paolo, Brazil; Egham and Manchester, England; Paris, France; Frankfurt and Munich, Germany; Milan and Rome, Italy; Utrecht, Netherlands; Madrid, Spain; Stockholm, Sweden; Zurich, Switzerland; North Sydney, Australia; Hong Kong; Tokyo, Japan; Seoul, South Korea; and Singapore. In addition, we lease executive office space throughout the world for our local sales and services needs.

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We believe that our existing facilities are adequate for our current needs. If additional space is needed in the future, we believe that suitable space will be available on commercially reasonable terms.

ITEM 3. LEGAL PROCEEDINGS

From time to time, in the normal course of business, various claims are made against us. At this time, in the opinion of management, there are no pending claims the outcome of which is expected to result in a material adverse effect on our financial position, results of operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of the fiscal year covered by this report, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise.

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PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock trades on the Nasdaq National Market under the symbol “HYSL.” The following table sets forth, for the periods indicated, the high and low sales prices of our common stock as reported on the Nasdaq National Market.

As of July 31, 2004, we had 262 stockholders of record and approximately 23,000 beneficial holders of our common stock.

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all earnings to finance future growth and, therefore, we do not anticipate paying any cash dividends in the foreseeable future.

Issuer Purchases of Equity Securities

The following table sets forth, for the periods indicated, our purchases of common stock in the fourth quarter of fiscal 2004.

[1]

On May 20, 2004, we announced that our board of directors had authorized a plan to repurchase up to $75.0 million of our common stock.

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ITEM 6. SELECTED FINANCIAL DATA

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Hyperion Solutions Corporation is a leading provider of Business Performance Management (“BPM”) software, which enables companies to translate strategies into plans, monitor execution, and provide insight to manage and improve financial and operational performance. Hyperion provides customers with solutions that include analysis and reporting tools, a business intelligence (“BI”) platform, packaged and tailored applications, and related services. Our solutions support the enterprise-wide processes for proactively managing any business toward optimal performance against goals and for anticipating and forecasting results.

Business Performance Management builds on business intelligence (commonly referred to as query, reporting and analysis), which provides information (including historic analysis, statistical predictions, and forecasts) that helps managers understand how their business is performing at any moment in time. Using data from transactional systems such as accounting, billings, bookings, supply chain, sales force automation, and call centers, our Business Performance Management solutions are used by employees at all levels across organizations – in the finance department and beyond – to provide a single version of the truth about an organization’s performance. Organizations can then leverage this information, which is presented in intuitive, easy-to-understand graphical views, to support continuous performance improvement and accountability.

We use our online analytical processing (“OLAP”) technology, Hyperion Essbase, as the analytic foundation for the Hyperion BI Platform. Components within Hyperion Essbase can be used individually to create tailored applications, or in conjunction with our packaged applications to support the entire Business Performance Management process.

On October 16, 2003, Hyperion completed the acquisition of Brio Software, Inc., a business intelligence software provider based in Santa Clara, California. The integration of Brio’s business intelligence software into our product portfolio has further enriched our platform’s query and reporting ability to access relational databases easily and quickly, and to support thousands of users. The Brio tools complement our Business Performance Management offerings and extend the use of business intelligence in the Business Performance Management processes of our customers.

Hyperion offers support and services from offices in 20 countries and works with more than 600 partners to provide solutions to more than 9,000 customer organizations worldwide.

CRITICAL ACCOUNTING POLICIES

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and judgments that significantly affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates, and such differences could affect the results of operations reported in future periods. We believe the following critical accounting policies affect our most significant estimates and judgments used in the preparation of our consolidated financial statements.

Revenue Recognition

We derive revenues from licensing our software products and providing maintenance, consulting and training services. Our standard software license agreement is a perpetual license to use our products on an end user, concurrent user or central processing unit basis.

We record revenue from licensing our software products to end users provided there is persuasive evidence of an arrangement, the fee is fixed or determinable, collection is reasonably assured and delivery of the product has occurred, as prescribed by Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition.” For arrangements with multiple elements, and for which vendor specific objective evidence (“VSOE”) of fair value exists for the undelivered elements, revenue is recognized for the delivered elements based upon the residual method in accordance with SOP 98-9, “Modifications of SOP 97-2 with Respect to Certain Transactions.” Amounts billed or payments received in advance of revenue recognition are recorded as deferred revenue.

Maintenance agreements are generally twelve-month prepaid contracts that are recognized ratably over the service period. VSOE of fair value for maintenance is measured by the stated renewal rates included in the agreements.

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Customers may also enter into arrangements that are typically on a time and materials basis for consulting and training services. VSOE of fair value for consulting and training services is based upon the standard hourly rate we charge for such services when sold separately. Training services are generally prepaid prior to rendering the service. Consulting and training revenues are typically recognized as earned. Consulting revenues are generated primarily from implementation services related to the installation of our products. These arrangements are generally accounted for separately from the license revenue because the arrangements qualify as “service transactions” as defined in SOP 97-2. Our services are generally not essential to the functionality of the software. Our products are fully functional upon delivery of the product and implementation does not require significant modification or alteration. Factors considered in determining whether the revenue should be accounted for separately include, but are not limited to: degree of risk, availability of services from other vendors, timing of payments and impact of milestones or acceptance criteria on the realizability of the software license fee. Payments related to the software product to which the services relate are typically billed independently from the services and, therefore, are not coincident with performance of such services. License agreements generally do not include acceptance provisions. In the infrequent circumstance where an arrangement does not qualify for separate accounting of the license and service elements, license revenue is generally recognized together with the consulting services using the percentage-of-completion method of contract accounting in accordance with SOP 81-1, “Accounting for Performance of Construction-Type and Certain Product-Type Contracts” and Accounting Research Bulletin No. 45, “Long-Term Construction-Type Contracts.”

If the fair value of any undelivered element included in a multiple-element arrangement cannot be objectively determined, revenue is deferred until all elements are delivered, services have been performed or until fair value can be objectively determined. License revenue from resellers or distributors is recognized upon sell-through to the end customer. If we determine that collection of a license fee is not reasonably assured, the fee is deferred and revenue is recognized at the time collection becomes reasonably assured, which is generally upon receipt of cash.

Accounts Receivable Allowances

We make judgments as to our ability to collect outstanding receivables and provide allowances for a portion of receivables when collection becomes doubtful. Provisions are based upon a review of all significant outstanding invoices. For those invoices not specifically reviewed, provisions are made at differing rates, based upon the age of the receivable. In determining these provisions, we analyze several factors, including: our historical collection experience, customer concentrations, customer credit-worthiness and current economic trends. If the historical data used to calculate the accounts receivable allowances does not reflect our future ability to collect outstanding receivables, we may record additional provisions for accounts receivable allowances. We record the provision for accounts receivable allowances in general and administrative expense and as a reduction of revenue in order to match the underlying cause of the provision to the appropriate classification in our statement of operations.

Our accounts receivable allowance was $8.8 million at June 30, 2004 and $8.2 million at June 30, 2003. The total provision for accounts receivable allowances was $8.1 million, $5.8 million and $20.9 million in fiscal 2004, 2003 and 2002, respectively. Of these provisions, $1.4 million, $1.4 million and $4.1 million were recorded in general and administrative expense in fiscal 2004, 2003 and 2002, respectively, and $6.7 million, $4.4 million and $16.8 million were recorded as a reduction of revenue in fiscal 2004, 2003 and 2002, respectively.

Income Taxes

Income taxes are accounted for using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns. The measurement of current and deferred tax assets and liabilities are based on provisions of the enacted tax law. The effects of future changes in tax laws or rates are not anticipated.

During the preparation of our consolidated financial statements, we estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax expense together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and, to the extent we believe that recovery is not likely, a valuation allowance is established. To the extent we establish a valuation allowance or increase this allowance in a period, an expense is recorded within the tax provision in the statements of operations.

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Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against the net deferred tax assets. We have recorded a valuation allowance due to uncertainties related to our ability to utilize some of our deferred tax assets, primarily relating to foreign net operating losses carried forward, before they expire. The valuation allowance is based on estimates of taxable income by jurisdiction in which we operate and the period over which the deferred tax assets will be recoverable. In the event that actual results differ from these estimates, or these estimates are adjusted in future periods, additional valuation allowances may need to be recorded, which could materially impact our financial position and results of operations.

Valuation of Goodwill, Intangibles, and Long-Lived Assets

We account for goodwill under SFAS 142, “Goodwill and Other Intangible Assets,” which requires us to review for impairment of goodwill on an annual basis, and between annual tests whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. This impairment review involves a two-step process as described in note 2 to our consolidated financial statements. We have determined that we have only a single reporting unit, and we are required to make estimates regarding the fair value of that reporting unit when testing for potential impairment. We estimate the fair value of our reporting unit using the market approach. Under the market approach, we estimate the fair value based on our market capitalization. Our determination that we have only a single reporting unit and the method used to estimate the fair value of that reporting unit require significant judgment.

We account for finite-lived intangibles and long-lived assets under SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires us to review for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors considered important which could trigger an impairment review include (i) significant underperformance relative to historical or projected future operating results, (ii) significant changes in the manner of use of the assets or the strategy for our overall business, (iii) significant decrease in the market value of the assets and (iv) significant negative industry or economic trends.

Based upon the existence of one or more indicators of impairment, we measure any impairment of intangibles or long-lived assets based on the estimated future discounted cash flows using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. Our estimates of cash flows require significant judgment based on our historical results and anticipated results and are subject to many factors that may change in the near term.

RESULTS OF OPERATIONS

We acquired Brio Software, Inc. on October 16, 2003. Brio’s results of operations have been included in Hyperion’s results beginning on the date of acquisition. In addition to the incremental revenue streams associated with Brio products and services, our headcount increased by approximately 15% in the second quarter of fiscal 2004 as a result of the acquisition.

REVENUES

Total revenues increased 22% in fiscal 2004 compared to fiscal 2003 and increased 4% in fiscal 2003 compared to fiscal 2002.

The change in foreign currency exchange rates favorably affected total revenues in fiscal 2004 compared to fiscal 2003 by approximately $19.5 million and favorably affected total revenues in fiscal 2003 compared to fiscal 2002 by approximately $21.2 million, in both cases primarily due to the strength of the Euro against the U.S. dollar. Excluding the impact of foreign currency rate changes, total revenues would have increased 18% in fiscal 2004 compared to fiscal 2003 and would have declined slightly in fiscal 2003 compared to fiscal 2002.

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Software license revenue. Software license revenues increased 19% to $240.1 million in fiscal 2004 from $201.8 million in fiscal 2003. While the fiscal 2004 license revenue growth was predominantly attributable to sales of Hyperion Performance Suite, the former Brio products, we also experienced balanced growth across our financial application product portfolio. These increases were partially offset by decreases in sales of our platform products in fiscal 2004 compared to fiscal 2003.

Software license revenues increased 3% to $201.8 million in fiscal 2003 from $196.1 million in fiscal 2002. The increase in license revenue in fiscal 2003 was primarily due to increased revenues from two of our newer application products, Hyperion Planning and Hyperion Financial Management. These two products were still in the early stages of their product life cycles during most of fiscal 2002, but they began making significant contributions to total license revenue in the fourth quarter of fiscal 2002 and into fiscal 2003. These increases in application product sales were offset to some extent by declines in revenue from our older, standalone application products, Hyperion Pillar and Hyperion Enterprise, and our platform products.

We market our products through our direct sales force and through channel partners. To date, we have generated the majority of our license revenue through our direct sales force, but we continue to focus on complementing our direct sales force with channel partners, which include original equipment manufacturers, value added resellers, system integrators and independent distributors. License revenue from channel partners comprised 24% of total license revenues in fiscal 2004 compared to 26% in fiscal 2003 and 25% in fiscal 2002. The percentage of license revenue derived from our channel partners can fluctuate between periods, as it is sensitive to individual large transactions that are neither predictable nor consistent in size or timing. No single channel partner represented more than 10% of total revenues during the periods presented.

Maintenance and services revenue. Maintenance and services revenue increased 24% in fiscal 2004 compared to fiscal 2003, which was comprised of a 25% increase in maintenance revenue and a 21% increase in consulting and training services revenue. Maintenance and services revenue increased 4% in fiscal 2003 compared to fiscal 2002, which was comprised of a 14% increase in maintenance revenue and a 12% decrease in consulting and training services revenue.

The increase in maintenance revenue in fiscal 2004 was primarily attributable to our acquisition of Brio in October 2003 and, to a lesser extent, to year-over-year growth of our installed customer base and improvements in our invoicing and collecting procedures for maintenance renewals, which was offset slightly by cancelled maintenance contracts. The increase in consulting and training services revenue in fiscal 2004 was principally due to our acquisition of Brio in October 2003 and, to a lesser extent, to increased utilization rates in our consulting organization.

The increase in maintenance revenue in fiscal 2003 was primarily due to additional sales of software to our customers and improvements in our invoicing and collecting procedures for maintenance renewals, which was offset slightly by cancelled maintenance contracts. During fiscal 2002 and fiscal 2003, we analyzed our customer portfolio to identify customers who may have been receiving maintenance services but were not paying for such services. This initiative resulted in the recognition of maintenance revenues from billings to customers in fiscal 2003 for maintenance services provided in prior periods. The decrease in consulting revenue in fiscal 2003 was primarily due to our continued focus on increasing the use of channel partners to provide consulting services for our customers. As part of this effort, we reduced headcount in our North American consulting organization by approximately 75 employees in the fourth quarter of fiscal 2002 and further reduced consulting headcount by approximately 25 employees during fiscal 2003.

COST OF REVENUES

Cost of software license revenue. Cost of software license revenue consists primarily of royalty expenses, amortization of capitalized software development costs, amortization of acquired technologies, and the cost of product packaging and documentation materials. Cost of software license revenue decreased 13% to $13.4 million in fiscal 2004 from $15.4 million in fiscal 2003 while software license revenue increased 19%. This decrease was primarily due to a $2.3 million decrease in royalty expense resulting from a different mix of product sales as well as the termination of our OEM relationship with Crystal Decisions. Partially offsetting the decrease in royalty expense in fiscal 2004 was a slight increase in acquired technology amortization expense primarily resulting from our acquisitions of Brio in October 2003 and The Alcar Group in April 2003.

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Cost of software license revenue remained relatively flat in fiscal 2003 compared to fiscal 2002 while software license revenue increased 3%. This was primarily due to a $1.9 million decrease in royalty expenses due to a different mix of product sales and a $0.8 million decrease in product packaging and documentation material costs due to our increased use of electronic product distribution. These decreases were substantially offset by a $1.5 million increase in amortization of capitalized software development costs and a $1.1 million increase in amortization of acquired technologies.

Gross margin on software license revenue was 94% in fiscal 2004 compared to 92% in fiscal 2003 and fiscal 2002.

In fiscal 2004, 2003 and 2002, we capitalized $2.2 million, $2.0 million, and $2.5 million of software development costs, respectively, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” The amounts capitalized relate to localization costs for our software products. Capitalized software product development costs are amortized over the estimated economic lives of the products, which is generally three years. The amortization of capitalized software development costs begins upon the general release of the software to customers.

Cost of maintenance and services revenue. Cost of maintenance and services revenue consists largely of compensation and benefits for support, consulting and training personnel. Cost of maintenance and services revenue increased 12% to $147.8 million in fiscal 2004 from $132.5 million in fiscal 2003. The increase in cost of maintenance and services revenue in fiscal 2004 compared to fiscal 2003 was principally due to a $7.8 million increase in employee expenses and a $7.7 million increase in subcontractor and other external personnel costs, both of which primarily resulted from our acquisition of Brio in October 2003. Maintenance and services headcount grew to 761 employees at June 30, 2004 from 743 employees at June 30, 2003, primarily due to the addition of incremental Brio employees.

Cost of maintenance and services revenue decreased 3% to $132.5 million in fiscal 2003 from $137.0 million in fiscal 2002, primarily attributable to our continued focus on leveraging our channel partners to perform consulting services for our customers. As a result of this effort, we reduced headcount in our North American consulting organization by approximately 75 employees in the fourth quarter of fiscal 2002 and further reduced consulting headcount by approximately 25 employees during fiscal 2003. This reduction in headcount contributed to a $2.2 million decrease in employee expenses for maintenance and services personnel in fiscal 2003 compared to fiscal 2002. Further, independent contractor and temporary staffing expenses decreased $1.0 million in fiscal 2003 compared to fiscal 2002 primarily due to our decreased use of external personnel for product implementations for customers.

Gross margin on maintenance and services revenue was 61% in fiscal 2004 compared to 57% in fiscal 2003 and 54% in fiscal 2002. The increase in gross margin on maintenance and services revenue in fiscal 2004 was due to increased consulting utilization rates and, to a lesser extent, due to a higher mix of maintenance revenue as a percentage of total maintenance and services revenues. The increase in gross margin in fiscal 2003 was primarily due to the increase in maintenance revenue as a percentage of total maintenance and services revenue. Maintenance revenue as a percentage of total maintenance and services revenue increased in fiscal 2003 due to maintenance revenue increases, as discussed above, as well as consulting revenue decreases due to our increased use of channel partners to provide consulting services.

OPERATING EXPENSES

Sales and marketing. Sales and marketing expense increased 19% to $226.0 million in fiscal 2004 from $190.0 million in fiscal 2003. This increase was mainly due to a $27.2 million increase in employee expenses that resulted primarily from our acquisition of Brio in October 2003 and a higher effective commission rate in fiscal 2004 compared to fiscal 2003. Sales and marketing headcount grew to 835 employees at June 30, 2004 from 680 employees at June 30, 2003, primarily due to the addition of incremental Brio employees.

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Sales and marketing expense increased 4% to $190.0 million in fiscal 2003 from $182.3 million fiscal 2002. This increase was primarily due to a $6.5 million increase in marketing expenses resulting from a heavier focus on a wide variety of demand generation activities. We also increased spending in the area of brand building and the advancement of Business Performance Management thought leadership.

Research and development. Research and development expense increased 30% to $96.2 million in fiscal 2004 from $73.8 million in fiscal 2003. This increase was mainly attributable to a $16.9 million increase in employee expenses that resulted primarily from our acquisition of Brio in October 2003. Research and development headcount grew to 531 employees at June 30, 2004 from 438 employees at June 30, 2003, primarily due to the addition of incremental Brio employees.

Research and development expense increased 2% to $73.8 million in fiscal 2003 from $72.2 million in fiscal 2002. This increase is primarily attributable to a $1.4 million increase in salaries and related employee expenses.

General and administrative. General and administrative expense increased 35% to $63.6 million in fiscal 2004 from $47.2 million in fiscal 2003. This increase was principally due to an $11.6 million increase in employee expenses that resulted primarily from our acquisition of Brio in October 2003. General and administrative headcount grew to 370 employees at June 30, 2004 from 338 employees at June 30, 2003, primarily due to the addition of incremental Brio employees.

General and administrative expense decreased 27% to $47.2 million in fiscal 2003 from $64.8 million in fiscal 2002. This decrease was primarily attributable to a $2.7 million decrease in bad debt expense resulting from improvements in the quality of our accounts receivable portfolio, a $4.1 million decrease in outsourcing costs, as we ended the outsourcing of our North American accounting department in the fourth quarter of fiscal 2002, a $4.4 million decrease in occupancy and equipment costs primarily due to a decrease in depreciation and amortization expense, as many fixed assets became fully depreciated during fiscal 2003, and a $1.5 million decrease in charges related to property and sales tax audits. These decreases were partially offset by a $3.2 million increase in salaries and related employee expenses resulting primarily from headcount increases as we brought our North American accounting function in-house.

RESTRUCTURING AND OTHER CHARGES

Restructuring and other charges totaled $4.2 million, $0.8 million and $0.1 million in fiscal 2004, 2003 and 2002, respectively.

In connection with the acquisition of Brio in October 2003, management approved and initiated plans to restructure the operations of Hyperion to eliminate certain duplicative activities and reduce the combined company’s cost structure. Consequently, we recorded restructuring charges totaling $3.6 million in fiscal 2004, including $3.4 million of employee severance costs and $0.2 million of facility closure costs.

In June 2001, we announced a corporate restructuring plan designed to bring costs more in line with revenues and strengthen the financial performance of the company, which resulted in a reduction of the workforce by approximately 300, or 12% of worldwide headcount. Employee groups impacted by the restructuring included personnel involved in corporate services, product business units, sales and customer support. In addition, we consolidated some of our facilities and exited other facilities. In fiscal 2004, 2003 and 2002, we made adjustments to the restructuring charges recorded in fiscal 2001 totaling $0.6 million, $0.8 million and $0.1 million, respectively. These adjustments resulted primarily from changes to our estimates of sublease income related to our facility exit costs and did not represent new restructuring activities.

A summary of restructuring and other charges and the related accrual balance is as follows (in thousands):

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The remaining accrual balance at June 30, 2004 of $13.9 million relates primarily to future lease obligations. Of this amount, $4.2 million is included in other current liabilities and $9.7 million is included in other liabilities on our consolidated balance sheet. Payments due under long-term lease obligations will continue to be made over the remaining lives of the leases. If we are unable to maintain a cost structure that is in appropriate balance with revenue going forward, whether due to failure to increase revenue adequately or failure to keep costs down, we could find it necessary to further adjust our cost structure through the execution of additional restructuring plans.

In the fourth quarter of fiscal 2004, we signed an engineering consulting agreement with a consulting firm based in Bangalore, India in an effort to increase our multi-shore development capacity and capability. The expansion of our multi-shore initiative will be gradual over fiscal 2005 and will ultimately result in about 150 to 200 additional developers contributing to our development efforts in India. Because of this initiative, in July 2004 we reduced our U.S.-based development staff by approximately 50 employees, or approximately 10% of our development headcount, and will record a restructuring charge in the first quarter of fiscal 2005 of approximately $1.0 million. This restructuring charge consists of severance and related benefits costs.

In the fourth quarter of fiscal 2004, we signed a lease agreement for a new corporate headquarters facility located in Santa Clara, California that will accommodate all employees in our existing leased facilities in San Francisco, Sunnyvale and Santa Clara, California. In July 2004, we vacated our San Francisco facility and will record a restructuring charge in the first quarter of fiscal 2005 of approximately $2.0 million. We expect to vacate our existing Sunnyvale and Santa Clara facilities in the second quarter of fiscal 2005, which will result in additional restructuring charges in the second quarter of approximately $6.0 million.

IN-PROCESS RESEARCH AND DEVELOPMENT

During fiscal 2004, in connection with our acquisition of Brio, we recorded a charge of $2.3 million related to the write-off of in-process research and development costs.

INTEREST AND OTHER INCOME

Interest and other income consists primarily of interest earned on cash, cash equivalent and short-term investment balances. Interest and other income decreased 27% to $4.3 million in fiscal 2004 from $5.8 million in fiscal 2003 and decreased 17% to $5.8 million in fiscal 2003 from $7.0 million in fiscal 2002 due to declines in short-term interest rates.

INTEREST AND OTHER EXPENSE

Interest and other expense consists primarily of interest paid and amortization of deferred issuance costs related to our convertible subordinated notes. Interest and other expense decreased 58% to $1.2 million in fiscal 2004 from $2.9 million in fiscal 2003. During the second quarter of fiscal 2004, we redeemed our remaining convertible subordinated notes with face values totaling $50.0 million, which significantly contributed to the decrease in interest and other expense in fiscal 2004 compared to fiscal 2003.

Interest and other expense decreased 37% to $2.9 million in fiscal 2003 from $4.6 million in fiscal 2002. During the first and second quarters of fiscal 2003, we repurchased convertible subordinated notes with face values totaling $28.7 million. In addition, we repurchased convertible subordinated notes with face values totaling $10.0 million during the fourth quarter of fiscal 2002. These repurchases significantly contributed to the decrease in interest and other expense in fiscal 2003 compared to fiscal 2002.

GAIN (LOSS) ON REDEMPTION OF DEBT

During the second quarter of fiscal 2004, we redeemed our remaining convertible subordinated notes with face values totaling $50.0 million. This redemption resulted in the recognition of a loss of $0.9 million in fiscal 2004, which was comprised of the 1.286% redemption premium paid as well as the write-off of associated deferred issuance costs.

During the first and second quarters of fiscal 2003, we repurchased convertible subordinated notes with face values totaling $28.7 million for a total cost of approximately $27.9 million, which resulted in the recognition of a gain, net of the write-off of associated deferred issuance costs, of approximately $0.5 million.

During the fourth quarter of fiscal 2002, we repurchased convertible subordinated notes with face values totaling $10.0 million for a total cost of $8.9 million, which resulted in the recognition of a gain, net of the write-off of associated deferred issuance costs, of approximately $0.9 million.

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INCOME TAX PROVISION

Our effective income tax rate was 38% in fiscal 2004 compared to 37% in fiscal 2003. Excluding the impact of the charge for in-process research and development of $2.3 million, which is not deductible for tax purposes, our effective income tax rate would have been 37% in fiscal 2004.

Our effective income tax rate was 37% in fiscal 2003 compared to 36% in fiscal 2002. Our effective income tax rate increased slightly in fiscal 2003 compared to fiscal 2002 due to a decrease in the impact of tax exempt interest and a change in the geographical mix of income.

NET INCOME

We generated net income of $43.8 million, or $1.10 per diluted share, in fiscal 2004 compared to net income of $34.1 million, or $0.96 per diluted share, in fiscal 2003 and net income of $15.0 million, or $0.45 per diluted share, in fiscal 2002.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2004, we had $365.2 million in cash and cash equivalents and $3.0 million in short-term investments, consisting primarily of balances in interest-bearing demand deposit accounts, state and municipal bonds, U.S. government and agency obligations and other highly-liquid securities. At June 30, 2004, our working capital was $274.0 million.

In fiscal 2004, 2003 and 2002, we generated positive cash flow from operations of $86.5 million, $88.1 million and $84.2 million, respectively. Our operating cash flows in fiscal 2004 were primarily due to the net income generated during the period and the positive impact of non-cash items reflected in net income such as depreciation and amortization expense and the impact of the income tax benefit from stock option exercises, partially offset by an increase in accounts receivable. In fiscal 2003 and 2002, our operating cash flows were primarily attributable to the net income generated during the periods and the positive impact of non-cash items reflected in the net income amount such as depreciation and amortization expense, as well as decreases in accounts receivable. The decreases in accounts receivable in fiscal 2003 and 2002 resulted from our focus on invoicing and collection process improvements, primarily for maintenance and consulting services.

Net cash used in investing activities amounted to $2.2 million, $26.8 million and $14.6 million in fiscal 2004, 2003 and 2002, respectively. The net cash used in investing activities in fiscal 2004 resulted primarily from purchases of property and equipment of $22.6 million and payments for acquisitions, net of cash acquired, of $6.9 million, which were partially offset by proceeds from maturities of investments, net of purchases, of $29.4 million. The net cash used in investing activities in fiscal 2003 resulted primarily from purchases of property and equipment of $19.8 million and payments for acquisitions of $6.0 million. The net cash used in investing activities in fiscal 2002 was primarily due to purchases of property and equipment of $13.5 million and purchases of intangible assets of $5.8 million, primarily consisting of acquired technologies. These cash outflows were partially offset by proceeds from maturities of investments, net of purchases, of $5.4 million in fiscal 2002. Our capital expenditures in fiscal 2004, 2003 and 2002 consisted primarily of purchases of resources to manage our operations, including computer hardware and software and leasehold improvements. The payments for acquisitions in fiscal 2004 related primarily to our acquisition of Brio in October 2003, and the payments for acquisitions in fiscal 2003 related to our acquisition of Alcar in April 2003.

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Net cash used in financing activities was $121.4 million in fiscal 2004 compared to net cash provided by financing activities of $20.1 million in fiscal 2003 and $4.3 million in fiscal 2002. The cash used in financing activities in fiscal 2004 resulted from $50.7 million paid to redeem our remaining outstanding convertible subordinated notes, which was authorized by our board of directors in October 2003, and $131.0 million of repurchases of our common stock under repurchase programs authorized by our board in July 2003 and May 2004. These cash outflows were partially offset by $60.4 million of proceeds from the issuance of common stock under our employee stock option and stock purchase plans. The cash provided by financing activities in fiscal 2003 was due to $50.4 million of proceeds from the issuance of common stock under our employee stock option and stock purchase plans, which was partially offset by repurchases of convertible subordinated notes totaling $27.9 million. The net cash provided by financing activities in fiscal 2002 was due to $13.4 million of proceeds from the issuance of common stock under our employee stock option and stock purchase plans, which was partially offset by repurchases of convertible subordinated notes totaling $8.9 million. As of June 30, 2004, we are authorized to repurchase up to an additional $68.9 million of common stock under the repurchase plan authorized by our board of directors in May 2004. We expect to continue to repurchase shares of common stock under this plan in fiscal 2005, subject to market conditions.

We intend to fund our capital requirements, as well as our liquidity needs, with existing cash, cash equivalent and short-term investment balances as well as cash generated from future operations, if any. However, capital requirements will depend on many factors, including our rate of revenue growth, market acceptance of our products, the timing and extent of development projects and increases in operating expenses, all of which are subject to uncertainty. We believe that our existing cash, cash equivalent and short-term investment balances, and cash generated from our future operations, if any, will be sufficient to finance our business through at least June 30, 2005. To the extent that existing cash, cash equivalent and short-term investment balances and cash generated by operations are insufficient to fund future activities, we may need to raise additional funds through public or private debt or equity financing. Additional funds may not be available on terms favorable to us or at all. In addition, our ability to generate positive cash flows from operations will be impacted by changes in customer demand and acceptance of our products as well as our ability to manage operating expenses and achieve further operational efficiencies.

The following table summarizes our contractual obligations as of June 30, 2004 and the effect such obligations are expected to have on our liquidity and cash flow in future periods:

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2004, the Emerging Issues Task Force issued Statement No. 03-06 (“EITF 03-06”), “Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share.” EITF 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-06 is effective for fiscal periods beginning after March 31, 2004. We adopted EITF 03-06 on April 1, 2004, and the adoption did not have a material impact on our financial position or results of operations.

RELATED PARTY TRANSACTIONS

In fiscal 2003 and 2002, Siebel Systems purchased approximately $0.2 million and $1.0 million, respectively, of software, maintenance and services from us for purposes of implementing an enterprise-wide financial planning system. In addition, Siebel has a future option to purchase the same products in accordance with normal contractual terms and conditions. The Chief Financial Officer of Siebel was on our board of directors from June 2000 to February 2003. As of June 30, 2003, all amounts due from Siebel related to these transactions had been received.

In fiscal 2003 and 2002, we purchased approximately $0.8 million and $3.0 million, respectively, of software, maintenance and services from Siebel for purposes of implementing a worldwide customer relationship management system. As of June 30, 2003, we had a payable to Siebel in the amount of $0.2 million related to these transactions, which was paid during fiscal 2004.

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FACTORS THAT MAY AFFECT FUTURE RESULTS

We operate in a very competitive and rapidly changing environment that involves numerous risks, some of which are beyond our control. The following discussion highlights some of these risks.

Product enhancement and new product introductions involve inherent risks.

Hyperion competes in a market characterized by rapid technological advances in hardware and software development, evolving standards in computer hardware and software technology and frequent new product introductions and enhancements. Hyperion continually seeks to expand and refresh its product offerings to include newer features or products, and enter into agreements allowing integration of third-party technology into Hyperion’s products. The introduction of new products or updated versions of continuing products has inherent risks, including, but not limited to:

•

product quality, including the possibility of software defects;

Hyperion’s failure to successfully introduce, market and sell new products and technologies, enhance and improve existing products in a timely manner, and properly position and/or price Hyperion’s products, and undetected errors or delays in new products or new versions of a product and/or the failure of anticipated market growth could have a material adverse effect on Hyperion’s business, results of operations or financial position. These risks tend to be greater when newer products make up a larger portion of the overall product mix. As more and more of these newer products are deployed, Hyperion’s service and maintenance organizations, along with its partners, must rapidly increase their ability to install and service these products, and Hyperion must rapidly improve their ease-of-implementation and ease-of-use. The failure to successfully increase these capacities and make these improvements could result in significantly lower customer satisfaction, which could lead to lower revenues and profits. For fiscal 2005, important newer products or product enhancements include Performance Suite 8 and Essbase 7.1.

Hyperion operates in a very competitive environment.

The markets in which Hyperion competes are intensely competitive, highly fragmented and characterized by rapidly changing technology and evolving standards. Hyperion has experienced, and expects it will continue to experience, vigorous competition from current competitors and new competitors, some of whom may have significantly greater financial, technical, marketing and other resources than Hyperion does. Cognos competes with Hyperion across a wide range of products, offering what they refer to as Corporate Performance Management solutions, as do, generally, the major ERP vendors, including SAP, Microsoft, Oracle and Peoplesoft. Many other companies compete in specific areas of Hyperion’s business. SAS and PeopleSoft have OLAP products and analytic applications, Business Objects and Cognos have query and reporting products, and numerous smaller vendors offer specific applications that compete with a single Hyperion product. Hyperion expects additional competition as other established and emerging companies, including Microsoft, PeopleSoft, SAP and Oracle, move further into both the application and platform parts of the business performance management software market. This competition could result in price reductions, fewer customer orders, reduced gross margins and loss of market share, any of which would materially adversely affect Hyperion’s business, operating results and financial condition.

If Hyperion is unable to develop or acquire new and enhanced products that achieve widespread market acceptance, Hyperion may be unable to recoup product development costs, and Hyperion’s earnings and revenue may decline.

Hyperion’s future success depends on its ability to address the rapidly changing needs of its customers by developing or acquiring new products and introducing such products, product updates and services on a timely basis. Hyperion must also extend the operation of its products to new platforms and keep pace with technological developments and emerging industry standards. Hyperion commits substantial resources to developing new software products and services. If the markets for these new products do not develop as anticipated, or demand for Hyperion’s products and services in these markets does not materialize or occurs more slowly than Hyperion expects, Hyperion will have expended substantial resources and capital without realizing sufficient revenue, and Hyperion’s business and operating results could be adversely affected.

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Failure to upgrade older products will adversely affect revenue.

As newer products are introduced by Hyperion, or by its competition, the market’s demand for Hyperion’s older products declines. Declining demand reduces revenue from additional licenses, and reduces maintenance revenue from past purchasers of Hyperion’s software. We must continually upgrade Hyperion’s older products in order for Hyperion’s customers to continue to see value in Hyperion’s maintenance services. If Hyperion is unable to provide continued improvements in functionality, or, alternatively, move customers from Hyperion’s older products to Hyperion’s newer products, declining maintenance and new license revenue from older products could have a material adverse effect on Hyperion’s business.

Hyperion typically has back-ended quarters.

Quarterly revenues and operating results are highly dependent on the volume and timing of the signing of licensing agreements and product deliveries during the quarter, which are difficult to forecast. Significant portions of Hyperion’s quarterly software licensing agreements are concluded in the last month of the fiscal quarter, generally with a concentration of such revenues in the final week of that month. Due to the relatively fixed nature of certain costs, including personnel and facilities expenses, a decline or shortfall in quarterly and/or annual revenues typically results in lower profitability or may result in losses. Prior to the very end of any quarter, Hyperion must rely on Hyperion’s forecasts of revenue for planning, modeling and other purposes. However, forecasts are only estimates and may not correlate to revenues in a particular quarter or over a longer period of time. Consequently, a significant discrepancy between actual results and sales forecasts could cause Hyperion to improperly plan or budget and thereby adversely affect Hyperion’s business or results of operations. Any publicly stated revenue or earnings projections by Hyperion are especially subject to this risk.

A change in pricing or marketing could adversely affect Hyperion’s business.

In an effort to simplify and clarify Hyperion’s product positioning and marketing, Hyperion periodically makes changes to Hyperion’s product pricing or product descriptions. Any product price reductions may not be offset by sufficient increases in unit sales to maintain or increase license revenues, and any broadly based changes to pricing or marketing messages could cause customers to change or delay their purchasing decisions in response to such revisions. Additional risks of such changes include delays in transactions as Hyperion’s sales force learns how to deploy the new pricing or convey Hyperion’s new marketing messages and delay or loss of revenues as the competition reacts to the pricing and marketing changes, any of which could have a material adverse effect on Hyperion’s business, results of operations or financial position.

Hyperion may not be able to continue its operational improvements.

As part of Hyperion’s focus on improving its operating margins, Hyperion is driving toward increased efficiencies in Hyperion’s sales force, as well as Hyperion’s services, product development, product marketing, finance, information technology, human resources and other administrative processes. The ability to continue to realize current efficiencies and find ways to improve on past performance is crucial to the improvement of operating margins. Any increase in the relative cost of these functions, or failure to continue to realize current efficiencies, could have a material adverse effect on Hyperion’s profits.

Reorganizations may adversely affect productivity.

Hyperion has continued to make adjustments to Hyperion’s operations and organization. These changes have historically resulted in productivity declines in the short term. The revised operations and/or organization must keep improving over past performance in order to provide better operating margins and efficiencies. Failure to maintain or improve momentum and productivity could materially adversely impact Hyperion’s revenue and profits.

Hyperion’s international operations are subject to significant risks.

Hyperion derives a substantial portion of its revenue from customers located outside of the United States. Hyperion’s international operations are subject to risks, including:

•

potential loss of proprietary information due to piracy, misappropriation or weaker laws regarding intellectual property protection;

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•

difficulties in hedging foreign currency transaction exposures;

Hyperion may not be able to successfully address each of these challenges.

Exchange rate fluctuations may adversely affect results.

Hyperion conducts a significant portion of its business in currencies other than the United States dollar. Hyperion’s operating results are, therefore, subject to fluctuations in foreign currency exchange rates. Hyperion’s revenues and operating results are adversely affected when the United States dollar strengthens relative to other currencies and are positively affected when the United States dollar weakens. Changes in the value of major foreign currencies, particularly the Euro, relative to the value of the United States dollar positively affected revenues and operating results in fiscal 2004 and 2003. If the United States dollar strengthens relative to other currencies in the future, our revenues, operating results and cash flows will be adversely affected.

There are significant risks related to any business combination.

Hyperion has made, and may in the future make, acquisitions of, mergers with, or significant investments in, businesses that offer complementary products, services and technologies. There are risks involved in these activities, including but not limited to:

•

the possibility that Hyperion pays more than the value it derives from the acquisition;

These factors could have a material adverse effect on Hyperion’s business, results of operations or financial position, especially in the case of a large acquisition.

Hyperion is subject to the possibility of infringement claims.

Hyperion expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors in Hyperion’s industry segment grows and the functionality of products in different industry segments overlaps. Hyperion has in the past been subjected to patent infringement claims. Any such claims, with or without merit, could be time consuming and costly to defend, divert management’s attention and resources, cause product shipment delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all, and may require the payment of substantial amounts of money. In the event of a successful product infringement claim against Hyperion, and Hyperion’s failure or inability to license the infringed or similar technology, Hyperion’s business, operating results, financial condition and cash flows could be materially adversely affected.

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Enforcement of Hyperion’s intellectual property rights may be difficult.

Hyperion relies primarily on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect Hyperion’s proprietary rights. Hyperion’s means of protecting its proprietary rights in the United States or abroad may not be adequate and could be subject to challenge, such as the reexamination of one of our patents by the United States Patent and Trademark Office.

Hyperion’s stock price may be volatile.

The market price of Hyperion’s common stock is subject to significant fluctuations. The market price of Hyperion’s common stock may be significantly affected by such factors as the announcement of new products, product enhancements or technological innovation by Hyperion or Hyperion’s competitors, announcements of acquisitions by Hyperion, changes in Hyperion’s or Hyperion’s competitors’ results of operations, changes in revenue, revenue growth rates and revenue mix, changes in earnings estimates by market analysts and general market conditions or market conditions specific to particular industries. Technology stocks have experienced wide fluctuations in prices, which sometimes have been unrelated to their operating performance. The market price of Hyperion’s common stock could be adversely affected by such fluctuations.

Hyperion is dependent upon indirect channel partners.

In addition to its direct sales force, Hyperion relies on indirect channel partners such as OEMs, VARs and distributors for licensing and support of its products in the United States and internationally. License revenue from channel partners comprised 24% of Hyperion’s total license revenue for fiscal 2004. Indirect channel sales involve a number of special risks, including:

•

Hyperion’s lack of control over the delivery of its products to end-users;

Hyperion’s current indirect channel partners may not elect, or be able, to market or support Hyperion’s products effectively or be able to release their products embedded with Hyperion products in a timely manner. Hyperion may not be able to effectively manage conflicts between its various indirect channel and direct customers, and economic conditions or industry demand may adversely affect indirect channel partners or indirect channel partners may devote greater resources to marketing and supporting the products of other companies. Revenues derived from indirect channel partners may fluctuate significantly in subsequent periods.

Hyperion’s most significant channel partner is IBM Corporation. Hyperion signed an OEM agreement with IBM in September 1996. This agreement can be terminated by IBM on 90 days notice anytime after September 27, 1996 and by Hyperion on 90 days notice anytime after December 31, 2003. If this agreement is terminated by either party, our revenues, operating results and cash flows could be adversely affected.

Hyperion is exposed to product liability claims.

Hyperion’s license agreements with its customers typically contain provisions designed to limit Hyperion’s exposure to potential product liability claims, and Hyperion carries insurance to protect against such claims. It is possible, however, that the limitation of liability provisions contained in Hyperion’s license agreements may not be effective as a result of U.S. or foreign laws or ordinances or because of judicial decisions, and that liability insurance may not be available, or that coverage for specific claims may be denied. Although Hyperion has not experienced any material product liability claims to date, the sale and support of business performance management products by Hyperion entails the risk of such claims. A successful product liability claim brought against Hyperion could have a material adverse effect upon Hyperion’s business, operating results and financial condition.

Defects in Hyperion’s products could increase its costs, adversely affect its reputation, diminish demand for its products and hurt its operating results.

As a result of their complexity, Hyperion’s software products may contain undetected errors or viruses. Errors in new products or product enhancements might not be detected until after initiating commercial shipments, which could result in additional costs, delays, possible damage to Hyperion’s reputation and could cause diminished demand for Hyperion’s products. This could lead to customer dissatisfaction and reduce the opportunity to renew maintenance or sell new licenses.

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Employee turnover could adversely impact revenue, costs and productivity.

As employees leave Hyperion, it suffers loss of productivity while new employees are hired, or promoted into vacant positions. There are also costs of recruiting and re-locating new employees. New employees must learn the Hyperion organization, products and procedures. Promoted employees must learn new skills. All of this takes time, reduces productivity and increases cost. The potential adverse impact of employee turnover is greater for situations involving senior positions in the company. Turnover rates tend to increase as economic conditions improve. If turnover increases, the adverse impacts of turnover could materially affect Hyperion’s costs, productivity or ability to respond quickly to the competitive environment.

Some provisions in Hyperion’s charter documents and its stockholder rights plan may prevent or deter an acquisition of Hyperion.

Some of the provisions in Hyperion’s charter documents may deter or prevent certain corporate actions, such as a merger, tender offer or proxy contest, which could affect the market value of Hyperion’s securities. These provisions include:

•

Hyperion’s board of directors is authorized to issue preferred stock with any rights it may determine. Consequently, Hyperion’s board of directors may issue preferred stock, without shareholder approval, that has rights superior to the outstanding Hyperion common stock;

Hyperion has in place a stockholder rights plan that is designed to discourage coercive takeover offers. In general, Hyperion’s stockholder rights plan makes it uneconomic for any person to acquire more than a 15% interest in Hyperion without the consent of the Hyperion Board of Directors.

Hyperion’s board of directors could utilize the provisions of its charter documents and stockholder rights plan to resist an offer from a third party to acquire Hyperion, including an offer to acquire Hyperion common stock at a premium to its trading price or an offer that is otherwise considered favorable by Hyperion stockholders.

If requirements relating to the accounting treatment for employee stock options are changed, Hyperion’s earnings may be adversely affected and we may be forced to change our employee compensation and benefits practices.

We currently account for the issuance of stock options under APB Opinion No. 25, “Accounting for Stock Issued to Employees,” under which we generally do not record compensation expense related to employee stock options. On March 31, 2004, the Financial Accounting Standards Board issued an Exposure Draft of a proposed accounting standard that would require public companies to report compensation expense related to stock options and other forms of stock-based compensation based on the estimated fair value of the awards on the grant dates. The final standard is expected to be issued in the fourth calendar quarter of 2004 and could be effective beginning in our fiscal year 2006. If the proposed standard is adopted in its current form, our earnings will be negatively impacted. Also, we may consider changing our employee compensation and benefits practices in a manner that could adversely impact our ability to retain existing employees and attract qualified candidates.

Failure to get approval for additional shares of common stock to be granted as employee stock options or restricted stock could adversely affect our ability to attract and retain employees.

We are seeking to obtain stockholder approval for additional shares of common stock that could be granted as employee stock options or restricted stock to our employees and directors. We may not be able to secure approval for these additional shares. If we do not get such approval, we will be forced to curtail our option issuance, which will adversely impact our ability to retain existing employees and attract qualified candidates.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK. The primary objective of our investment activities is to preserve principal while maximizing yields, without significant risk. To achieve this objective, we maintain our portfolio of cash equivalents and short-term investments in a variety of high-quality, liquid securities. At June 30, 2004 and June 30, 2003, our short-term investments consisted of investment-grade debt securities with fair values totaling $3.0 million and $18.5 million, respectively, consisting primarily of U.S. government and agency obligations and state and municipal bonds. Due to the short duration of our investment portfolio, an immediate 10% change in market interest rates would not have a material impact on the value of our investment portfolio.

FOREIGN CURRENCY EXCHANGE RATE RISK. We transact business in various foreign currencies, primarily the Euro and British pound. Our exposure to foreign currency exchange rate fluctuations arises in part from non-functional currency denominated trade accounts receivable and intercompany receivables. Intercompany receivables arise when software royalty fees and certain other costs incurred in the United States are charged to our foreign sales subsidiaries. These intercompany accounts are typically denominated in the functional currency of the foreign subsidiary, which is generally their local currency. From time to time, we utilize foreign currency forward exchange contracts to offset the risk associated with the effects of these trade receivables and certain intercompany receivables for which we anticipate settlement in the foreseeable future. As a result, increases or decreases in these accounts due to foreign exchange rate changes are offset by gains and losses on the forward contracts. Our forward contracts generally have terms of 60 days or less. We do not use forward contracts for trading purposes. All foreign currency balances and all outstanding forward contracts are marked-to-market at the end of the period with unrealized gains and losses included in our consolidated statements of operations. Our ultimate realized gain or loss with respect to currency fluctuations will depend on the currency exchange rates and other factors in effect as the contracts mature.

Net foreign exchange transaction gains and losses were not material for fiscal 2004, 2003 and 2002. At June 30, 2004 and June 30, 2003, we had net forward contracts to sell U.S. dollar equivalent of $33.5 million and $4.7 million, respectively, in foreign currency. An immediate 10% change in currency exchange rates affecting these contracts would not have a material impact on our results of operations.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
     Hyperion Solutions Corporation:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Hyperion Solutions Corporation and its subsidiaries at June 30, 2004 and 2003 and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

San Jose, California
September 10, 2004

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HYPERION SOLUTIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)

See accompanying notes to consolidated financial statements.

32

HYPERION SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

See accompanying notes to consolidated financial statements.

33

HYPERION SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY & COMPREHENSIVE INCOME
(In thousands)

See accompanying notes to consolidated financial statements.

34

HYPERION SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

See accompanying notes to consolidated financial statements.

35

HYPERION SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)

See accompanying notes to consolidated financial statements.

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HYPERION SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS

Hyperion Solutions Corporation is a leading provider of Business Performance Management (“BPM”) software, which enables companies to translate strategies into plans, monitor execution, and provide insight to manage and improve financial and operational performance. Hyperion provides customers with solutions that include analysis and reporting tools, a business intelligence (“BI”) platform, packaged and tailored applications, and related services. Its solutions support the enterprise-wide processes for proactively managing any business toward optimal performance against goals and for anticipating and forecasting results.

Business Performance Management builds on business intelligence (commonly referred to as query, reporting and analysis), which provides information (including historic analysis, statistical predictions, and forecasts) that helps managers understand how their business is performing at any moment in time. Using data from transactional systems such as accounting, billings, bookings, supply chain, sales force automation, and call centers, our Business Performance Management solutions are used by employees at all levels across organizations – in the finance department and beyond – to provide a single version of the truth about an organization’s performance. Organizations can then leverage this information, which is presented in intuitive, easy-to-understand graphical views, to support continuous performance improvement and accountability.

Hyperion uses its online analytical processing (“OLAP”) technology, Hyperion Essbase, as the analytic foundation for the Hyperion BI Platform. Components within Hyperion Essbase can be used individually to create tailored applications, or in conjunction with our packaged applications to support the entire Business Performance Management process.

On October 16, 2003, Hyperion completed the acquisition of Brio Software, Inc., a business intelligence software provider based in Santa Clara, California. The integration of Brio’s business intelligence software into Hyperion’s product portfolio has further enriched its platform’s query and reporting ability to access relational databases easily and quickly, and to support thousands of users. The Brio tools complement Hyperion’s Business Performance Management offerings and extend the use of business intelligence in the Business Performance Management processes of its customers.

Hyperion offers support and services from offices in 20 countries and works with more than 600 partners to provide solutions to more than 9,000 customer organizations worldwide.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The consolidated financial statements include the accounts of Hyperion and its subsidiaries, all of which are wholly-owned. All significant intercompany accounts and transactions have been eliminated. Certain prior period amounts in the consolidated financial statements and notes thereto have been reclassified to conform to the current period presentation. These reclassifications had no effect on the prior periods’ total assets, stockholders’ equity, net income or net cash flows.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that significantly affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Significant estimates include those related to revenue recognition, accounts receivable allowances, income taxes and valuation of long-lived assets, among others. Actual results could differ from those estimates, and such differences could affect the results of operations reported in future periods.

Revenue Recognition